Introduction    

Welcome to The Gold Collar Investor podcast with your host Pancham Gupta. This podcast is dedicated to helping the high paid professionals to break out of the Wall Street investments and create multiple income streams.

Here’s your host, Pancham Gupta.

Pancham: When it comes to retirement planning, most people I know only know about either employer-sponsored 401k plans or SEP-IRA plans for small business owners. Most of these plans let you invest only in the Wall Street products. However, there is a whole new world of retirement accounts that you are going to learn. Today my guest, Dimitri is going to discuss something that will open up your mind on how to use your retirement money to build long-term wealth. Dimitri is the founder & president of Sense Financial Services, LLC, a boutique financial firm specializing in self-directed retirement accounts with checkbook control. He began his career in financial planning and real estate investing in 2000. He owns multiple investment properties in various states and is a licensed California real estate broker. Over the years, he has taught hundreds of investment and financial planning seminars and has mentored thousands of investors. Dimitri welcome to the show.

Dimitri: Thank you so much Pancham for having me. It’s great to be on the show.

Pancham: Are you ready to fire up my listeners break out of Wall Street investments?

Dimitri: Most definitely.

Pancham: Great. So before we get started, would you like to add anything to your background, as you mentioned?

Dimitri: Sure. Just very briefly, you know, I’m an immigrant. I immigrated in this country from Russia23 years ago, and I didn’t have any money, I didn’t speak English, but I knew this was a land of opportunities and so I love the language started, you know, studying and then I got into real estate investing in about the year 2000-2001 and so I started just like most people, you know, from ground zero, and I had bought successes and failures, and I can talk about that if you’d like later on in the show. I can share some of my experiences and you know, I think it’s great what you’re doing.

Pancham: Oh, that sounds great. We have the last section of the show dedicated to that. So we’ll definitely dive into it. So let’s get right into this whole new world and you’re the one who actually opened up my eyes when I got going. So, what is Self-Directed IRA, Solo 401k or Check-Book IRA? Can you go briefly into these?

Dimitri: Sure. Let’s talk about Self-Directed IRA first. As you mentioned, in the beginning, most conventional retirement accounts that few people are familiar with – a traditional IRA or 401k, or other employer-sponsored planets forward such as 403B or 457. Or maybe when a pension plan, they can find that the investment options are confined to the stock market. So people only familiar with mutual funds, maybe some bonds, and stocks, and there is really no other options for folks to invest in but the options are out there, options are available. And if you have an account with…Just a conventional custodian like fidelity or TD Ameritrade, Schwab then the custodian limits your investment options. But what is possible is to convert that retirement account into Self-Directed IRA, which is still an IRA. It’s an IRA, but the custodian does not place limitations and you can open an account with the self-directed custodian. They will hold your money but you have virtually limitless investment options.

Pancham: So just to interrupt, sorry to interrupt you there. So you’re saying just like Fidelity or TD Ameritrade, there are custodians which will do the exact same thing but let you invest wherever you want.

Dimitri: Exactly. Yeah. So, the way the mainstream you know, financial firms make money is by offering you investments. So when you go to Fidelity and open IRA there, they allow you to pick from certain stocks or mutual funds that they offer. They have that at that disposal, and when you invest they make small commissions off that. So that’s how they make money. Obviously, if you go outside of invest in something else like alternative investment options, such as real estate, for example, then there’s no incentive for them. So that’s why they don’t offer those options. It’s not prohibited by the IRS, IRS allows you to own real estate in your IRA or 401k, but custodians place those limitations and they condition consumers to believe that that’s all the options they have. So many people don’t even know that it is impossible. But yes it is possible you can have an IRA with the self-directed custodian and you can invest in alternative assets such as real estate, private land and so on.

Pancham: I see, I see. Okay, so that is Self-Directed IRA, right?

Dimitri: Yeah, Self-Directed IRA is held by the custodian just like any other custodian, but there is no limitation on the investment options. So in order for you to invest, you have to submit the request to the custodian with appropriate paperwork, wait for them to review it, approve it, and then they can advance the funds for that particular investment. And the downside of this particular model is you don’t have direct access to your funds and every time you do a transaction it costs you. Custodian charges your fee. So you know, the great thing you have those options, but there are negatives and comes with the cost. So you’d mentioned Check-Book IRA, and that’s what the Check-Book IRA comes in. It’s basically another vehicle…enhanced version of a Self-Directed IRA that allows you to have checkbook control over your retirement account.

Pancham: I see. So that’s the only difference between Self-Directed IRA and Check-Book IRA that the Self-Directed IRA you have to go through custodians to do any kind of transaction, but for Check-Book IRA, I have literally the checkbook with me just like have it for bank accounts, and I can write checks and invest. Is that right?

Dimitri: Exactly, yeah, and how you are accomplish that, let me explain this. It’s a Check-Book IRA is still Self-Directed IRA. You have to have a custodial account for an IRA. So you can’t avoid that. There is another option, which, you know, I’d like to mention. We don’t have time to dig into that more, but it’s a solo 401k which designed for those people who are self-employed, and it does not require a custodian and we can talk about that another time. But an IRA requires a custodian. You must have a custodian for an IRA. So you open a custodial accounts with custodial that allows alternative investments and then roll over your funds from your existing retirement account. Next I will be creating a special per single member LLC. This LLC will be owned by your IRA and will be managed by you and at that point, once the LLC is set up and approved by the IRS, we will obtain a tax ID number from the IRS and then we will instruct the custodian to buy LLC unit. So basically, what happens is your IRA invest into this LLC, and most hundred percent of this LLC. So the funds then transferred from the custodial account to the LLC check-in account and client becomes a manager of that LLC and that’s how they gain the control. So you literally have a check-in account with your IRA money in it and you, as a manager have control over how does funds are investing. If you still have to follow the same rules which I think is important to mention now that when it comes to self-directed investing, there are certain rules in place. You have a lot of freedom to invest but there are certain limitations that you must be aware of and those limitations are- number one you cannot invest in collectibles and life insurance contracts. So those are…

Pancham: I see.

Dimitri: the two investment assets that are not allowed. 

Pancham: That’s it. What about cryptocurrency? Let’s say there is cryptocurrency or gold and silver or you know all these crazy assets out there. Can you…

Dimitri: Yes, you can invest in all of those. Cryptocurrencies, precious metals. You name it, you can invest. So IRS actually does not tell you what it is that you can do. What you can invest. Rather what they do is they do have a description of what you cannot do and you cannot invest in collectibles and collectibles can be anything that is collectible…considered collectible you cannot invest it can be perhaps an artwork maybe some collectible stamps or coins or you know anything that this collectible is a no-no.  

Pancham: I see

Dimitri: As I mentioned life insurance contracts and for the most part is also transaction involving the disqualified person and a disqualified person is the account holder – yourself, your spouse, your children and grandchildren, and their spouses as well as your parents and grandparents. So if you look at this description, it’s a vertical line.

Pancham: I see. So the vertical line from the top to bottom like my grandfather, my children, you know. What about my sisters?

Dimitri: Yes. Now you can go sideways your sister and your cousin, your uncle, your friend are not considered disqualified so you can transact business with your IRA with those persons, you can go sideways. You just cannot go vertically with your parents and your children, your spouse.

Pancham: So let me clarify something here. So what you’re really saying is that once I have created one of these accounts, then I can go and invest in a business with one of these guys, and I cannot be active in that business. Those guys are the active owners of the business. I have invested some money and they’re going to give me some equity portion and some, you know, return in exchange for that. And that’s all legal.

Dimitri: Well, this is…you’re getting a little bit more into complex…

Pancham: I see. Okay.

Dimitri: There and I can talk about that. That’s going to take some time. What I can tell you briefly is that retirement accounts are designed to be invested passively. And passively mean it has to be passive investments. So you can buy shares to a corporation or, you know, you could, that’s how you can invest in the business, but if your 401k actually becomes the owner of the business, not a shareholder, but actually owns a business like an LLC, then there is going to be issues with that, because now that is going to be on the related business income.

Pancham: All right.

Dimitri: So taxes will apply. So again, I want to make it clear retirement accounts designed to be invested passively, like you know lending money to somebody else, you’re fully passive or buying shares of a C Corporation then you don’t own the company, you are a shareholder, I mean you own it indirectly to shares but you actually not involved in you know day to day operation or investment decisions. If you own an LLC or your IRA owns the LLC, for example, then it becomes a partner in that entity and it will be considered that IRA owns the business directly. So that’s going to maybe something we can discuss another time.

Pancham: Okay.

Dimitri: Which is a good topic.

Pancham: Okay. So yeah, without getting into those complexities, let’s keep it very basic for now. So to summarize, you said before we get move on Self-Directed IRA, there is Check-Book IRA, sorry, Check-Book IRAs, also Self-Directed IRA, it just has different controls, and then we have solo 401k. Right? These are the three options that people have pending on their situation. They can use one of these three to basically take money out of these Wall Street products and invest money in alternative investments.

Dimitri: You got it. Yeah, so, you know, self-directed IRA is a basic type of account and are great for certain type of investments that don’t require many transactions like for example, being a private lender a long term, or invest in it in some kind of a note firm or maybe a private placement or a syndication where you’re just receiving payments, income payments from your investment. But those that do require some more hands-on. And what I mean by that maybe own you know rental property or you know maybe perhaps buying a property, the action or doing a short-term lending. So, some of those things they do require decisions to be made quickly, and they do require funding quickly also and that’s not possible with the custodial IRA. So that’s what the Check-Book IRA comes in. It’s for certain investor who wants to have that control. Yeah, the investment can be made as simple and as quickly as writing a check, literally.

Pancham: Right. So that’s actually great. So, let me ask who can really open it. A lot of my listeners are, you know, working for high tech firms or, you know making…are bankers or lawyers, where they are making a lot of money and have employer-sponsored 401k case? Can they just take that money out and convert into this? Or are there any restrictions for just opening the accounts?

Dimitri: Yeah, that’s a good question. Now, basically, anybody can open Self-directed IRA or a Check-Book IRA. Anybody can do it, as long as you have your income to contribute, which this IRA typically is funded by the rollover from another retirement account. Because as you know, and your most of your listeners probably know, there is a limit how much you can contribute to an IRA, and the limit is $5500 a year.

Pancham: Correct.

Dimitri: It’s not much to do alternative investments with. So, usually, people who have other retirement accounts they commonly set up a Self-Directed IRA Check-Book IRA. Now, let me mention that if you have an IRA, or if you have, maybe a 401k with the previous employer, you can move those accounts into Self-Directed IRA. But if you have a 401k with the current employer, the chances are you will not be able to touch those funds until you are no longer employed with the company or reach retirement age, which can be, you know as early as 50 or 55 in some cases. So you have to inquire with your employer with maybe your HR department or talk to a custodian. Just call the toll-free number and your statement and inquire to see if you can move, maybe you can move the portion out. You want to be able to move out of it, that’s for sure, but sometimes you can learn you can move portion of your funds. There might be an amount that your employer will allow you to move while you’re still employed, but if it’s a previous employer 401k or an IRA, those are for sure can be converted. 

Pancham: Right? You know, I asked my employer and I know a lot of people who have asked their employees, some of my friends were trying to do this, we were shot down right away. We could not really do it. So yeah…

Dimitri: So, I mean that is what I say. That’s my experience in most cases, but I’ve seen occasions I’ve seen that some employers will allow you to move, you know, some portion. So, again, if that’s really if this is really what you want to do, then don’t just give up. I mean, it doesn’t take much, and your end to go in and check with your employer. I mean, the worst case or the worst answer, you’re going to get is no. So then you know for sure, but it’s worth inquiring into this

Pancham: Okay, sounds good. So, let’s say, you know, I am ready to open one of these accounts. Right? And how long does it take? And what is the process involved for me to actually go about opening these accounts? Do I have to tell my employer? What happens?

Dimitri: Yeah, so, you know, depends on the type of account. So if you’re setting up a custodial account, the Self-Directed IRA with the custodian, it probably can be opened in just a few days, and then it can be funded maybe in a week. That’s typically how long it takes that or lower. It also depends on what the money is coming from. So, if you’re doing that from your 401k with the if it’s a 401k, with the past employer, then you have to contact your 401k and enquire for the requirements. Usually, they will give you some forms, oftentimes you can access them online, and you can complete them and then submit that request. If you’re moving money from an IRA, then all you have to do is open a new custodial account, complete paperwork there, and they will send the request to your existing IRA custodian, and they will send the money.

Pancham: I see.

Dimitri: So now, that’s opening the custodial account. If you’re interested in the Check-Book IRA, the process is going to be more complex and longer because there is LLC. And LLC is a major component of the Check-Book IRA, that’s what makes it possible. So, in this case, then there are two additional steps that are involved, and the total time from start to finish for a Check-Book IRA, from the time that you started until the LLC set-up, and you have your checking account funded, takes approximately three to four weeks.

Pancham: Okay. Okay. So let’s say I have these accounts opened and I funded them. What is the ongoing maintenance in status is needed? Number one and number two, what are the tax repercussions? What do I need to do at the end of the year when I’m filing my taxes now that I have this LLC if I have the Check-Book IRA account?

Dimitri: Well, whether you have an LLC or not, it does not affect your personal taxes because this is an IRA. IRA is a tax-deferred vehicle, and it does not affect your personal taxes. So, what you do inside of an IRA is not going to affect your personal tax rate. Now they might be a need for them, there might be taxes due in an IRA, and this is again coming back to what you mentioned earlier, like investing in the business or rather, owning a business from an IRA. If you own a business through IRA, the income will be subject to what’s called UBIT, which stands for Unrelated Business Income Tax.

Pancham: I see.

Dimitri: So, you usually don’t want to own a business in an IRA, you can, you can learn to business or you can buy shares, and we important point to understand is that if you like, in your example, you mentioned that you have a friend maybe who starting a business and you want to help him or invest in business with your IRA. The proper way to do that is only if that business is set up as a C-Corporation, and you can buy shares of the C-Corporation with your IRA. If it’s not a C-Corporation. It cannot be done with S-Corporation because with S-Corp you have to be a person to be a shareholder, so it just not going to work for the C- Corp for the S-Corp. And if it is an LLC, if your IRA owns units of the LLC or becomes member of the LLC that represents ownership, and then portion of the income will be subject to that UBIT tax. But if you lend to LLC, underhand then all that income will be shelter it from taxes or if you own shares of the C-Corporation. So those are important things when it comes to business to do it properly.

Pancham: I see and what about the ongoing maintenance? Do I have to do anything that would not do normally because now I have these accounts?

Dimitri: Well, the maintenance also depends on what it is that you’re doing and whether you have checkbook control or not.

Pancham: I see.

Dimitri: So, if one thing that you need to be aware of is if you buying an investment property, like a rental property in your IRA, whether it has a checkbook control or not, and you use leverage. So, you, by the way, if you want to use leverage in an IRA, you can. So, for example, if you buy a rental property for $100,000, you can put a down payment, and you can get a loan. Let’s say usually, those types of loans, they do require a larger down payment – somewhere between 30% to 40%. So, if you come up with the 40%, down payment, let’s say $40,000 comes from your IRA and you get a loan for 60%, then the loan must be Non-recourse meaning there is no personal guarantee, so you can’t use a conventional loan. You can only use a lender that offers Non-recourse financing and there were a handful of them, not many. There was a few of them. By the way, we do have at least on our website.

Pancham: Nice.

Dimitri:  sensefinancial.com under Check-Book IRA under the drop down there is a list of lenders that over eight years…you know, it’s a pretty comprehensive list, but I pulled, you know, all of the lenders that I was able to locate or listed there.

Pancham: Nice. I will put that in the show notes.

Dimitri: Okay, good, and one thing to keep in mind if you use leverage. Portion of the income will be subject to UBIT tax, because using leverage is not considered it, you know the primary function of the IRA and there’s going to be some taxes too. So, if that is the case, then the IRA will owe taxes then you have to work with the CPA, and there’s going to be form 990T that you’ll be required to file.

Pancham: It makes 100% sense to me that we have to pay taxes on that, because the $60,000 in your example is not your money, you’re using that money from someone else, which potentially is not coming from retirement account, but actual account and IRS is asking you to, you know pay money on that part of it, you know. Because you’re using that money, which is not yours.

Dimitri: That’s right. Yes. Now one thing to mention is that you brought up solo 401k and that’s what we did for you, but solo 401k is exempt from the UBIT tax and leverage real estate. So that’s a great benefit of our advantage it has over, or am I right?

Pancham: Yeah, we’ll do a separate show just on solo 401k for people who are self-employed or thinking of going into self-employment. All right. So, is there anything else you want to add to Check-Book IRA? Before we get into the next section…

Dimitri: Yeah, another thing that basically I was going to say that with checkbook IRA, the only requirement is going to be reporting the value of the LLC to your custodian because custodian does not have access to your LLC. You are the manager, you are the only one who controls it, and you know, we don’t have access to our client’s finances of the IRAs.

Pancham: Correct.

Dimitri: Custodian does not have access to that either. So it’s going to be your role to report that the value of the LLC and elect the custodian.

Pancham: I see, I see, got it. Anything else you want to add to this?

Dimitri: That’s it, I think.

Pancham: All right, great. That’s a lot of information to digest for one show. Let’s go into the next section of the show, which I call, “Taking the leap” round. I asked these four questions to every guest on my show. The first question I have for you is when was the first time you invested outside of Wall Street?

Dimitri:  Well, for me, that was real estate and first property I purchased was in 2001.

Pancham: All right at the peak.

Dimitri: Actually, it wasn’t the peak. The peak was about 2005-2006…may be so. Actually I have done really well on that property. I…

Pancham: That was the peak of the.com bubble not really the real estate.

Dimitri: Yeah, not the real estate. It was a good time I started well. I purchased two properties, one in 2001 and one in 2002, and both of them they almost tripled in value.

Pancham: Wow, you still have them?

Dimitri: I do not, no.

Pancham: Okay. Alright, so let’s go into the next question. What fears did you have to overcome when you first invested outside of Wall Street?

Dimitri: Well, you know, obviously, there were fears, you know, what if this happened? What if that happens? And what helped me to overcome them is, I just went into local networking groups, local investment meetings and I also had some relatives, two of my brother-in-law’s they owned investment properties. So just talking to them and getting educated on this.

Pancham: Right. Education is so important, you know, that basically takes care of the fears in a way. All right. So, can you share with us one investment that did not go as expected?

Dimitri: Well, maybe two. I would like to share two if you don’t mind?

Pancham: Yeah, sure.

Dimitri: And one is, as I mentioned, I started in 2001, and I did really well with those properties, and when they appreciate that I pulled some of the equity out and just continue to invest. And I continue to invest 2005, 2004-2005-2006. That was the peak. So, that wasn’t a good time. So, I end up you know, buying at the wrong time, and I’m looking back, you know, to be honest with myself and with you, probably the major thing that drove me was the greed and also not having, you know, proper knowledge about the timing of the markets.

Pancham: Yes.

Dimitri: So that was a painful experience for me. I lost a few properties, I lost money. But it was also a good learning experience.

Pancham: Yeah, I call all of those things, experiences or seminars that teach you life lessons so that you don’t make those mistakes again.

Dimitri: Yeah, but you know, for your listeners, its better that you learn it from somebody else’s experience, not your own. You don’t have to make the same mistakes.

Pancham: And that’s why I really ask this question to every guest.

Dimitri: Yeah.

Pancham: And so that listeners can learn from it.

Dimitri: The other investment that did not go as planned was a private loan that I made, and I started in just rental properties, but then a few years ago, maybe five-six years ago, I got into private lending, and I was just lending my money to other people who are buying real estate, and so I did lend money to this company actually. They had many properties and so it was a forced trust deed secured by real property. Well, they did not do proper management of their portfolio and they end up defaulting on the loan and that was somewhere difficult time for me I had you know, because I invested I think $40,000 into this loan, but it turned out actually well and you know. It didn’t go as expected it actually turned out even better because I talked to the owner and he agreed to do the property over to me instead of me foreclosure and so I did a deed in foreclosure, so he signed the property over to me and now I became an owner of this property in my retirement account, and I think I lent $42,000.It’s a property in Pennsylvania. And my monthly payments were $350 a month, and once I become the owner the rent on that property is $675.

Pancham: Wow.

Dimitri: And the property is worth about $65,000.

Pancham: Nice.

Dimitri: It’s actually, you know, that’s why I like private lending because it’s passive, and if you do it correctly, then your worst-case scenario can be a win for you.

Pancham: Nice, nice. That’s pretty cool. Okay, let’s go to the next. My last question, which is, what is one piece of advice would you give to people who are thinking of investing in the main street?

Dimitri: Well, by Main Street…

Pancham: Non-Wall street, anything outside of the Wall Street basically.

Dimitri: Oh, outside the Wall street, okay. Well, I think it’s important to educate your-self and just think about this. You know, when it comes to a Wall Street, the stock market, if you think about this, I’m sure you will agree with me that you and I, we cannot control it. We don’t have any control over the stock market, and you know, we do certain things like maybe dollar cost averaging or maybe investing in index mutual funds. You’ll do okay but ultimately, we don’t have control over that. When you invest in alternative assets like real estate, for example, you have a lot more control. Where to buy the type of property you can buy, the kind of improvements you can make, what kind of tenants you’re going to put, whether it’s a long term or short term, and there’s a lot more control you can do. And with example that I gave you is a private lender, the risk is much lower. Now if I invested that in a company, and they fail, the company was mismanaged, then I will probably lose everything. Yes, there was a risk and yes, there was a period of time as it was going through this. It was stressful for me and it was a first-time experience for me, you know, being a lender and my borrower defaulted on the payments. But the bottom line is that it was a secure loan. I had real property security and that long, so I ended up not lose and I ended up actually gaining.

Pancham: Nice Yeah, exactly. Exactly, and if you know, we did a whole show on this. What are the differences between Wall Street and Main Street and people who have not listened to that they can go back, it’s a show number four, I believe, and this is exactly one of the points that we’re discussing that

Dimitri: Cool.

Pancham: Cool. So how can listeners reach you, Dimitri? If they want to open up, let’s say, one of these accounts and learn more about it?

Dimitri: Well, the best way to contact me or just learn more about this is to go to our website sensefinancial.com and sense is like common sense, sensefinancial.com, and we do have information and articles and videos there on various options that are available. 

Pancham: Great. Thank you so much for coming today, Dimitri. It’s definitely, I’m sure listeners have gotten a lot of value out of it. Thank you so much.

Dimitri: Yeah. Thanks for inviting me.

Pancham: Thanks.

Do you ever feel overwhelmed by the thought that you have no time after work, and family time to learn about investing? Do you feel left behind that you are not putting your money to work for you? Do you want to create passive income but you do not know where to start? If so, I have good news for you. I have created an investor club which I call The Gold Collar Investor Club for accredited investors. I will be putting together investing opportunities exclusively for this group. These are the opportunities where I have done my part of the due diligence for you and will be investing my own money alongside you. If you are interested, please sign up on thegoldcollarinvestor.com/club. I repeat thegoldcolorinvestor.com/club. I will reach out to schedule a 30-minute phone conversation to discuss your investing goals. Once you sign up, this can be a good opportunity to diversify and take some chips off the hands of Wall Street to produce some cash flow and in case you are wondering what is an accredited investor credited investor is someone who has earned more than 200,000 as filing single, or more than 300,000, filing jointly for the last two years. Another way to qualify as an accredited investor is if your total network is more than $1 million excluding your personal home, it includes your stocks 401K’s, IRA’s, cars, etc. Just not the equity in your personal home. If this is you, I would highly encourage you to sign up.

Thanks for listening. If you have questions email me at p@thegoldcollarinvestor.com that’s p as in Paul @thegoldcolorinvestor.com

This is Pancham signing off until next time, take care.

Thank you for listening to the gold color investor podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook at the gold collar investor. The information on this podcast or opinions as always, please consult your own financial team before investing.